The impact of high raw material costs was visible on Tata Tea’s results for the March 2010 quarter, with operating profit margins slipping 170 basis points year-on-year to 11.1 per cent. Nonetheless, its stock continues to outperform the broader markets. While the company is looking to expand in new markets, it intends to further diversify its product range with focus on non-tea products through partnerships, acquisitions and product innovations.
Business growth
A hike in product prices and amalgamation of revenues from Russian company Grand (acquired in September 2009) boosted consolidated net sales by 28 per cent year-on-year to Rs 1,575 crore in the March quarter. While tea prices rose 17-20 per cent last fiscal, Tata Tea was able to pass on most of this increase to customers. It has been able to manoeuvre prices differently in different geographies. Compared to developing countries, however, in mature markets like the UK, where around 70 per cent sales happen through retail outlets, its ability to effect price hikes was restricted. Positively, its ability to gain markets shares across categories and countries is impressive. For instance, while it overtook HUL in value market share (reaching 2.16 per cent) in India’s tea market, its Eight O’Clock (18 per cent of sales) coffee brand helped increase its market share in the US.
| IMPROVING OUTLOOK | |||
| In Rs crore | FY10 | FY11E | FY12E |
| Net sales | 5,783 | 6,407 | 7,046 |
| Ebitda | 684 | 800 | 880 |
| Net profits | 393 | 460 | 520 |
| EPS (Rs) | 63.40 | 74.20 | 83.90 |
| P/E (x) | 16.90 | 14.40 | 12.80 |
| E: Analysts estimates | |||
While tea contributes around 70 per cent to sales, the black tea market globally is a mature category and growing slowly. In order to sustain healthy growth, Tata Tea will continue to develop a range of products like coffee and non-black tea products. While a liquid tea mix (Tetley infusions), launched last year in Canada, T4Kidz has been launched in the UK market; Sukk, a green tea-based jelly drink, is also ready for the UK city test launch. The company is also actively looking at an alliance with PepsiCo in the non-carbonated ready-to-drink beverage segment. Lastly, expect further investment in the distressed Himalayan brand, as management perceives that water holds immense potential in developing countries like India. In the long run, these initiatives should help Tata Tea posses a well-balanced portfolio, truly reflecting its proposed new name—Tata Global Beverages.
Investment rationale
The US is the biggest beverage market, wherein Tata Tea’s acquisition of Eight O’ clock is bearing fruit. Russia, another important market where Tata Tea made an acquisition recently, could help increase the contribution of coffee, which accounts for around a fifth of revenues and over 25 per cent of profits. Similarly, Tetley’s recent foray into the Middle East and focus on enhancing presence in South Africa through Joekels, a subsidiary, should boost sales. The cash component of around Rs 150 per share in its books should come in handy as the company looks to expand inorganically.
Meanwhile, raw tea prices have slid in the last few months and experts suggest that input costs will ease, helped by an increase in tea output. Consequently, Ebitda (earnings before interest, tax, depreciation and amortisation) margins should improve from 11.8 per cent in 2009-10 to 12.5 per cent on an average for 2010-11 and 2011-12, respectively. At Rs 1,069.75, the stock is trading at 14.5 times estimated 2010-11 earnings and can be accumulated for the long term.